Understanding Outside City Utility Rates
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With household budgets stretched, more consumers are looking at their utility bills, and we have seen renewed interest and activity on setting adequate utility rates, including “outside city” rates. For a decade or more the topic of how municipal water utilities charge customers outside the city boundaries for services has been debated. It also has been contested at the IURC and in various trial courts. As a result, there has been guidance generated from these multiple authorities. It is helpful to remind ourselves why an outside utility rate differential can be appropriate and in the public’s interest:
1) Lower customer density – There are commonly fewer customers per mile of mains. Therefore the utility’s asset costs per customer are higher in the outside-city area.
2) Greater costs – Often additional facilities are required to serve only the outside-city customers. These facilities are of no benefit to the inside-city customers.
3) Growth – Increase in demand for facilities is often spurred by growth and development that occurs on the margins of the city. The question becomes one of fairness. Is it fair to make inside-city customers (who already have the service) pay for new customers?
4) Ownership – The utilities are owned by the municipality, and the municipality bears the ultimate risk of because of its ownership. The utility’s rates should include a reasonable return on the utility plant of the municipality that would include a risk-adjusted return on its investment in utility assets serving customers outside the city.
5) Environmental – The regulatory trend has been toward regionalization of utility facilities, because one larger facility is usually cheaper to operate, staff, license and regulate than many smaller satellite facilities. The rate structure should not discourage a municipality for extending its municipal utility assets for the greater good of the region, but rather should encourage it.
6) Intrinsic value – If the municipal utility assets were not available, the cost of developing satellite facilities to serve suburban customers would almost certainly be higher than the municipality’s rates. This inherent value calculation involves some discretion, but it is a consideration in all of the factors above and is best expressed as part of the reasonable return on the utility‘s plant.
Utility rates are required to be set to recover the costs of providing service. If outside-city rates are lowered, inside-city rates must increase to compensate for lost revenues. The way to properly allocate costs among user groups is to conduct a detailed cost-of-service study. These studies can be time consuming and thus difficult for municipalities to perform internally.
Determining appropriate utility rate differentials are all fact sensitive and case specific.
Please contact us at footnotes@umbaugh.com if you have any questions or if we can be of assistance.
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Information in this article was believed current as of the date of publication. As you know, changes occur frequently. The information presented is of a general educational nature. Before applying to your specific circumstances, please contact us at footnotes@umbaugh.com.